An ETF Focusing on the Next Generation of Automobiles

Innovation Shares has come out with its second exchange traded fund, targeting next generation vehicles and technologies like artificial intelligence that could advance the motor vehicle industry to its next phase.

"Like we did with KOIN, we are excited to use our patent-pending AI driven methodology to build a diverse portfolio of equities with exposure to the theme of electric & autonomous vehicles," Matt Markiewicz, Managing Director with Innovation Shares, told ETF Trends. "As the next generation vehicle mega-theme is in early stages of ramp up, we feel we have identified a complete basket of companies that are well positioned to benefit from more supportive government regulations and accelerating global consumer demand of electric and self-driving vehicles."

The new Innovation Shares NextGen Vehicles & Technology ETF tries to reflect the performance of the Innovation Labs Next Generation Vehicles Index, which is comprised of companies engaged in the development of “New Energy Vehicles,” such as vehicles propelled by one or more electric motors powered by rechargeable battery packs, or “Autonomously Driven Vehicles,” such as vehicles capable of driving themselves from a starting point to a predetermined destination in “autopilot” mode using various in-vehicle technologies and sensors, according to a prospectus sheet.

The underlying index also employs a type of natural language processing algorithm, which identifies relationships between keywords that are representative of targeted investment trends and themes or strongly tied to Next Generation Vehicles and related technologies.

Companies are categorized as “Battery Producers” or those that mine for metals used in the production of batteries, manufacture of materials and specialty chemicals and components used in batteries, and production of battery cells; “Original Equipment Manufacturers” or companies that design, manufacture and distribute Next Generation Vehicles; “Suppliers” or companies that produce or distribute parts and components used in Next Generation Vehicles; and “Semis and Software” or companies that produce semiconductors used in advanced driver-assistance systems, light detection and ranging and infotainment systems and develop software necessary for sensing, mapping, and providing driving policy within Next Generation Vehicles.

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Each of EKAR's stakeholder categories has a 40% max weighting as per the index methodology, with current weights comprised of Semis & Software 39%, OEMs 33%, Suppliers 15% and Battery Producers 13%.

Markiewicz explained the ETF's largest country weighting is the US at 41% followed by Japan at 17%, Germany 12% and China at 10%. There are 15 countries represented in the index.

"As the world’s appetite for not only electric but self-driving vehicles increases, it is possible that the basket could become even more geographically diverse," Markiewicz said.

Looking ahead, Markiewicz sees strengthening momentum in the space. According to a December 2017 McKinsey Center for Future Mobility report, in autonomy, 1-2% of vehicles currently sold are equipped with basic partial automation technologies. By 2025, 80% of the top 20 OEMs are planning to have at least Level 4 automation, so cars can fully drive themselves in most situations with hardly any human intervention. In the electric vehicle space, 3.5% of the vehicles sold now have xEV or hybrid/plug-in powertrains which compares to 51% of the models announced until 2021 that are expected to have xEV powertrains.